Chinese bank yuan holdings fall as leaders keep note

Yuan holdings at Chinese banks have fallen for the first time since December 2007, fuelling speculation that capital outflows will take pressure off policymakers to speed up gains in the currency.

Financial institutions’ yuan positions declined a net 24.9 billion yuan ($3.9 billion) in October, according to a statement on the People’s Bank of China (PBOC) website. Economists watch the numbers for signs of inflows or outflows of so-called hot money. China will move to allow more yuan flexibility in an active, gradual and controllable manner, the official China Central Television channel cited Premier
Wen Jiabao
as telling US President
Barack Obama
at the summit of Asian leaders in Bali on Saturday.

Mr Obama said last week “enough is enough" on what the US views as the too slow appreciation of the yuan.

“Capital outflows are evidence that the yuan is overvalued, not undervalued," Tim Condon, Singapore-based head of Asian research at ING Groep, wrote in a research note. “We think the suggestion of outflows is a near insurmountable obstacle to any exchange-rate reform like widening the yuan trading band."

The yuan may face depreciation in two years as the country’s trade surplus may account for less than 1.6 per cent of gross domestic product in 2011, Li Daokui, an adviser to the PBOC, said.

President
Hu Jintao
told Mr Obama on November 12 that a large appreciation won’t solve US problems. The yuan traded at 6.3545 per dollar at 11:42 am in Shanghai yesterday, compared with 6.3554 at the end of last week. The currency gained 4 per cent this year, the best performance of Asia’s 10 most-traded currencies, excluding the yen.

The central bank strengthened the daily reference rate for the yuan by 0.04 per cent to 6.3522 yesterday. The currency is allowed to trade 0.5 per cent either side of the fixing. Twelve-month non-deliverable forwards for the yuan dropped 0.06 percent to 6.3363.